Even though Merkley-Levin didn't make it into the Senate bill, there's still a chance that the Merkley-Levin language will make it into the conference report, so I want to respond to the defenses of the amendment that were offered. (My original post is here.) Mike Konczal wrote a post defending Merkley-Levin that was badly confused, on several levels.

First, Konczal writes:

I think Merkley-Levin is way ahead of this critique, and what EoC doesn’t mention is that the bill provides for this. In case they excluded too much from permitted activities at the statutory level, regulators can add some provided it meets a certain threshold (p. 10):

‘‘(d) PERMITTED ACTIVITIES…(I) Such other activity as the appropriate Federal banking agencies, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, jointly determine through regulation, as provided for in subsection (c), would promote and protect the safety and soundness of the banking entity or nonbank financial company and the financial stability of the United States.

If there are activities that could be justified in promoting safety and soundness, regulators can include them into the bucket of permitted activities. Note that this is a fairly high bar to hurdle, so regulators have to make a fairly good excuse to go for it.

This is not a point in Merkley-Levin's favor, and I have no idea why Konczal thinks it is. The point I made was that the 9 categories of "permitted activities," which function like exceptions to a ban on proprietary trading, were way, way too broad, and would effectively swallow the prop trading ban. The provision Konczal cited is one of the 9 categories of permitted activities. It's what's known as a "catch-all" exception. Essentially, this says that in the unlikely event that a trade can't be justified under one of the 8 other ridiculously broad exceptions, there's yet another catch-all exception the trade could potentially fall under. This does not help Konczal's argument.

Next, he cites section (d)(3) of Merkley-Levin, which provides:

(3) CAPITAL AND QUANTITATIVE LIMITATIONS.—The Board, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, shall adopt rules imposing additional capital requirements and quanitative limitations regarding the activities permitted under this section if the Board determines that additional capital and quantitative limitations are appropriate to protect the safety and soundness of the banking entities and nonbank financial companies engaged in such activities.

This provision is completely irrelevant. It essentially just says that regulators can raise capital requirements of impose quantitative limitations in order to protect the "safety and soundness" of the BHC. Uh, great, but prudential regulators already have that authority. (In fact, for technical reasons, this provision of Merkley-Levin would almost certainly have to be stripped out, because it would directly conflict with several other provisions of existing law. Like I said, very poor drafting.)

Finally, Konczal makes the "it's a floor, not a ceiling" argument. He notes that Merkley-Levin gives regulators the authority to force BHCs to terminate activities that the regulator determines are "intended to evade the requirements of this section (including through an abuse of any permitted activity)." This misses the entire point, which is that prop trades wouldn't need to evade the requirements of Merkley-Levin — they would be fully compliant with the requirements of Merkley-Levin. Virtually all prop trades would fit legitimately under one of the categories of "permitted activities." It would not be "an abuse of [a] permitted activity" — it would be exactly what Merkley-Levin contemplates, and in fact codifies. And that's precisely the problem.

So yes, Merkley-Levin is still a joke. I have quite a bit of experience in this area, and I guarantee that if the Merkley-Levin language makes it into the conference report, Wall Street will shred it, and continue prop trading just as before. Fighting for the Merkley-Levin language does not make you "tough on Wall Street." It makes you naïve.

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comments:

as a former litigator who worked in Manhattan, while i don't have your technical background, i think your take is correct about the language. people who do not perform linguistic legerdemain on a regular basis do not grasp your point, much less the notion of the exception swallowing the rule.

while in this context this lack of understanding is unfortunate, it occurs to me that perhaps we should consider ourselves fortunate that the general society does not yet operate in this fashion. i am more than a bit apprehensive as to what a society of people who think like, say, Robert Moses, would be like.

In relation to exception (G), Zach Carter proposes that the criterion of "directly or indirectly controlled by a United States person" means that any subsidiary of a US bank will be "controlled" by either the US Bank (assuming a US bank is a "US person") or the people in the US who direct or control the people in London who staff the US subsidiary. Does Carter's point negate your view that (G) provides a loophole for prop trading?

In relation to the deficiencies of technical drafting of legislation, one alternative might be to take the "technical" out of the drafting and leave the legislation as simple and high level as possible, then write a detailed, prose based, explanation of the intention of the law into the explanatory memorandum to instruct judges what the legislators were intending to do in the legislation. That way we'd have far fewer and less complex laws, with more explicit understanding of what legislators were intending.

Not trying to be insulting (like some of the comments on this issue...) but Volcker has endorsed this provision, and it was his idea. Now, he might not be a finance lawyer, but he Fed Chair for awhile, and that might give him just a biiit of street cred on this issue.

to be a pastBuy Diablo 3 gold litigator which worked inside New york, while i will not have ones specialized backdrop, i think your own acquire will be right regarding the vocabulary. people who will not perform language legerdemain often usually do not knowledge ones place, a lot less the idea of the Billig Gw2 Gold exception to this rule swallowing the principle.

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I'm a finance lawyer in New York. I used to focus on derivatives and structured finance (you know, back when there was a structured finance market). I spent the majority of my career at one of the major investment banks. My background is in economics and, unfortunately, politics.

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